Advice on Buying a Bankrupt Business

May 08, 2025

by a searcher in San Antonio, TX, USA

I'm looking at aquiring a bankrupt consumer goods business. It's 10+years old, most of the sales occur online. At its peak it generated over $4M in revenue (95% organic no marketing) and roughly 9% profit margin. It currently makes no money and has lost money the past couple of years due to 'bad management' per the owner, thus the bankruptcy. They have roughly $900k in inventory that requires $150k (not included in purchase price) to release and ship to the US from China. They are asking $300k+ for the business. I'm very interested because I've used the product personally and it's great. They have a large following and dedicated customers that want to buy. And I feel that there a great levers to pull to bring in more revenue (marketing, new onlines sales channels, etc), but I'm finding that getting a loan is not possible. We have enough liquidity to pay for the purchase price cash, but we will be tight and could have issues buying and shipping the inventory DTC. I do worry about cashflow problems after the initial inventory is sold (buying new product). We are exploring asset based loans to help us bridge the gap to get us started. Since this deal is in bankruptcy the owner will not be the decision maker as to how much or to who the business sells to. The creditors make that decision. So we will have to navigate that purchasing process with the creditors. What are your thoughts, is this a good deal or not? Could we put ourselves in a bad spot or is this a great deal. Would like to hear other's perspectives. And would like to hear of any experiences of buying a business in bankruptcy and advice as to how that process works and what to look out for. Thanks

Reply by a professional
from Bentley College in Miami, FL, USA

Buying a bankrupt business can offer compelling upside — especially when there’s brand equity, proven demand, and underperformance tied to fixable issues like poor management. That said, it’s also a cash flow and risk management puzzle that needs to be carefully mapped out. A few key considerations: 1. Working Capital Needs – If you’re buying this with most of your liquidity, the real risk is not the purchase price — it’s running out of capital to operate, especially if turnaround takes longer than expected. Your instincts around securing asset-based financing or inventory funding are smart. Explore options like purchase order financing or revenue-based lending that align with inventory cycles. 2. Bankruptcy Process Nuances – Since the sale is controlled by creditors (not the owner), it’s critical to understand whether this is a 363 sale (free and clear of liens) or if liabilities might follow. You’ll want legal diligence to ensure you’re not taking on unexpected baggage. Bidding can also get competitive if others see the value, so be clear on your walk-away number. 3. Customer Retention & Brand – You mentioned a loyal following. If those customers are still engaged despite recent struggles, that’s a valuable intangible asset. Gauge the depth of that loyalty — review email lists, social media engagement, and recent order activity. 4. Growth Plan Validation – Map out a conservative scenario: assume marketing ROI is slower, and repeat inventory buys are delayed. Will you still survive? Consider a 6-12 month runway cushion. At DueDilio, we often see buyers bring in turnaround operators, restructuring advisors, or fractional CFOs for support with cash flow modeling and negotiations in distressed deals — especially when bankruptcy is involved.

Reply by a searcher
from Western Michigan University in Grand Rapids, MI, USA

If you are asking for advice about it, I would avoid it. Turnarounds are not easy and because it is bankruptcy, many of the methods that could be used to limit your downside aren't available (bankruptcy trustees aren't too keen on earnouts, seller financing, etc.). To top it all off, the purchase price for these types of companies can be deceiving. You have already mentioned the additional $150k needed, but there will be other "hidden" expenses that come up. It might also take time to ramp things up to where the business can pay you to run it. You will want access to a significant amount of cash beyond the purchase price.

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